Cairn-Vedanta deal to go thru as OilMin waters down conditions

Cairn-Vedanta deal to go thru as OilMin waters down conditions

New Delhi: After keeping it on tenterhooks for months, the government looks set to clear London-listed mining group Vedanta Resources’ $9.6 billion acquisition of Cairn India without any significant precondition.

This follows the Oil Ministry watering down preconditions it had set for Vedanta to buy a 51% stake from UK’s Cairn Energy, sources with direct knowledge of the matter said.

In a draft Cabinet note circulated for approving the deal, the ministry has almost withdrawn its precondition that Rs21,802 crore in royalty and cess paid by state-owned Oil and Natural Gas Corp (ONGC) on behalf of Cairn India on production from the Rajasthan oilfields should be equitably shared.

“In the first draft, the Oil Ministry had proposed to the Cabinet that approval be granted only after Cairn India agrees to equitable sharing of royalty and paying its sharing of cess," one of the sources said.

“However, in the note that was finally circulated to the ministries of finance, law, home, environment and corporate affairs for comments, the Petroleum Ministry has given an alternative that it will continue to legally pursue equitable sharing of royalty and cess, but will not make it a precondition for approval of the deal," he said.

Significantly, the ministry has completely withdrawn its precondition asking Cairn India to give up its legal rights on future disputes over its mainstay Rajasthan oilfield and abide by the government and oil regulator DGH’s dictat.

“The note lists two alternatives. In the first, it lists out five preconditions, instead of 11 it had originally proposed to Cairn/Vedanta in January.

“The five preconditions include royalty being made cost recoverable, Cairn India withdrawing arbitration disputing its liability to pay cess, Cairn India obtaining partner ONGC’s no-objection and Vedanta providing performance and financial guarantees," a second source said.

As an alternative to the precondition of royalty and cess, the ministry has suggested that government shall pursue all legal recourse for establishing its rights under the Production Sharing Contract (PSC) in the case of cess. On royalty, it shall take appropriate decision to enforce the provisions of PSC to make royalty cost-recoverable.

Sources said it was unlikely that the Cabinet will go with the first option when an easier and least controversial option has been given in the second.

ONGC owns a 30% stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields. Over the life of the field, the royalty burden works out to Rs18,000 crore, of which ONGC has to also bear Cairn’s share of about Rs12,600 crore.

Cairn has also disputed any liability to pay Rs2,500 per tonne cess on its 70% share of production from the Rajasthan blocks, which totals up to Rs9,202 crore for ONGC over the life of the field.